Emerson 2009 Annual Report Download - page 30

Emerson 200928
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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Years ended September 30 | Dollars in millions, except per share amounts or where noted
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
The preparation of the nancial statements in conformity with U.S. generally accepted accounting principles (GAAP)
requires management to make estimates and assumptions that affect reported amounts and related disclosures, and
actual results could differ from those estimates. The Company has evaluated subsequent events through November 23,
2009. Certain prior year amounts have been reclassied to conform to the current year presentation. Operating results
of the European appliance motor and pump business are classied as discontinued operations for 2008 and earlier
periods, while the operating results of Brooks Instruments are classied as discontinued operations for 2008 only.
Emerson adopted the FASB Accounting Standards Codication (ASC) in the fourth quarter of scal 2009. The Codica-
tion reorganized and consolidated current U.S. GAAP topically and is now the single authoritative source for GAAP. The
adoption had no effect on the Company’s operations.

The Consolidated Financial Statements include the accounts of the Company and its controlled afliates. Intercom-
pany transactions, prots and balances are eliminated in consolidation. Investments of 20 percent to 50 percent of the
voting shares of other entities are accounted for by the equity method. Investments in publicly-traded companies of
less than 20 percent are carried at fair value, with changes in fair value reected in accumulated other comprehensive
income. Investments in nonpublicly-traded companies of less than 20 percent are carried at cost.
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The functional currency for most of the Company’s non-U.S. subsidiaries is the local currency. Adjustments
resulting from translating local currency nancial statements into U.S. dollars are reected in accumulated other
comprehensive income.
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Effective October 1, 2008, the Company adopted the recognition and disclosure provisions of FAS No. 157, “Fair Value
Measurements” (now part of ASC 820, Fair Value Measurements and Disclosures), which established a formal hierarchy
and framework for measuring fair value, and expanded disclosure about fair value measurements and the reliability of
valuation inputs. Under ASC 820, measurement assumes the transaction to sell an asset or transfer a liability occurs in
the principal or at least the most advantageous market for that asset or liability. Within the hierarchy, Level 1 instru-
ments use observable market prices for the identical item in active markets and have the most reliable valuations. Level
2 instruments are valued through broker/dealer quotation or through market-observable inputs for similar items in
active markets, including forward and spot prices, interest rates and volatilities. Level 3 instruments are valued using
inputs not observable in an active market, such as company-developed future cash ow estimates, and are considered
the least reliable. Valuations for all of Emerson’s nancial instruments fall within Level 2. The fair value of the Compa-
ny’s long-term debt is estimated using current interest rates and pricing from nancial institutions and other market
sources for debt with similar maturities and characteristics. Due to the high credit quality of Emerson and its counter-
parties, the impact of adopting ASC 820 was inconsequential. ASC 820 is effective for nonnancial assets and liabilities,
including goodwill and certain other intangible and long-lived assets, beginning in scal 2010.
If credit ratings on the Company’s debt fall below pre-established levels, derivatives counterparties can require imme-
diate full collateralization on instruments in net liability positions. Similarly, Emerson can demand full collateralization
should any of the Company’s counterparties’ credit rating fall below certain thresholds. For derivatives in asset posi-
tions, no credit loss is anticipated as the counterparties to these agreements are companies with high credit ratings.
The Company has master netting arrangements in place with its counterparties that allow the offsetting of derivative-
related amounts receivable and payable when settlement occurs in the same period. Accordingly, counterparty
balances are netted in the consolidated balance sheet, with the net values of commodity contracts currently reported
in current assets and net values of foreign currency contracts reported in accrued expenses. See Note 7.
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Cash equivalents consist of highly liquid investments with original maturities of three months or less.
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Inventories are stated at the lower of cost or market. The majority of inventory values are based on standard costs that
approximate average costs, while the remainder are principally valued on a rst-in, rst-out basis. Standard costs are
revised at the beginning of each scal year. The effects of resetting standards and operating variances incurred during
each period are allocated between inventories and cost of sales.